Money Life: Phillip Colmar on turbulence in 2024 and sheltering your portfolio

This interview has been edited for clarity.

Investors face a host of crosscurrents in the stock market and in the economy. Stock indexes are at record highs while economists debate the possibilities of recession. The Federal Reserve seems poised to cut interest rates but inflation remains a nagging presence. Two wars are being waged in Ukraine and Gaza as dozens of elections are slated to occur this year across the globe.

Sorting out the impact of those events on your portfolio can be difficult. That’s where someone like Philip Colmar, global strategist at MRB Partners — the Macro Research Board, can come in handy. As an independent top-down research firm, MRB does not manage money but it makes its asset allocations public so you can see how its strategies stack up.

I recently spoke with Colmar about the current investing environment and what MRB Partners research is showing.

Chuck Jaffe: Let’s talk about what it is that you were suggesting people do in this environment where you have the wild cards, but you have the positive economic news that we’re talking about the, the potentially come to realization moment that inflation is not going to wind up getting down to where it’s supposed to be. How are we supposed to be playing this? What’s the right thing to be doing?

Philip Colmar: In the investment strategy in our outlook now, we think investors should really be banking on higher for longer bond yields. Some of those rate cuts that were priced into the bond market have got to come back out because the window for Fed rate cuts is going to close. It’s not going to give you the five rate cuts the market’s been looking for.

If you’re on the equity side of the equation, then you’re dealing with a better growth backdrop than you may have thought from the soft landing to really a no landing or regaining altitude kind of scenario. But you’re dealing with higher bond yields.

In that kind of environment, you’re gonna wanna be more selective in your mix. You’re gonna favor things that have earnings power to outperform or at least the bar is not so high on earnings and at the same time, give you some valuation support. In that mix, some of those longer duration tech-related stocks that have been leading the market become vulnerable.

But some cyclical rotation comes in here. I’m thinking megacap financials come into that, aerospace and defense, even … the energy sector. So you might want to augment it with that. Those that are a little bit more cautious in their portfolio: Don’t go for the [consumer] staples and the utilities. Go for the less correlated [sector], which is health care.

CJ: And international versus domestic, do you need to be getting boots on the ground internationally? Can you do it with U.S. multinationals?

PC: You really do need to start to look international. The reason is the high concentration of the magnificent seven [stocks] in the United States and the tech sector is really what’s lifted [the market] up. If those longer duration assets come into question, then the U S is going to face some vulnerabilities. Also, when you’re dealing with a firmer global growth backdrop, maybe a higher bond yield, there are better plays outside [the U.S.] where there’s a lower earnings bar to hurdle and better valuations.

In this case, I’m thinking the euro area is disappointed for a couple of years in terms of investor expectations. It isn’t a big upside bar to surpass there. And at the same time, the earnings out of most sectors are outperforming the globe. So you’re already getting earnings support, but not truly appreciated by investors at this base at this point.

We have a bet in Japan as well. We think that there’s some upside in terms of a global trade cycle picking up and should help Japan even from an external perspective. And then emerging Asia would be our other outside bet. You don’t really have to invest into China. In fact, it’s not the best bang for your buck if you’re thinking about the trade cycle. It’s really the rest of emerging Asia, but you need a stable China in the backdrop, which we think we’ll get.

CJ: And lastly, are there any alternatives that stand out to you? Is there much traction to be made in the stuff that’s not necessarily mainstream? Bitcoin and crypto, any of that?

PC: I think commodities in general could have an outside surprise. If we go into sort of a no-landing kind of [economic] scenario, inflation is a bit stickier. There might be an attraction back into the commodity space. We’re going to express that more so through commodity-related stocks here in terms of the trade book than the physicals.

Cryptos are one of those hot areas that keep coming back. It’s certainly an enticing theme, and I think it’s a great theme. Long term, there’s a lot of crosscurrents in that space. So you’re going to have to absorb real volatility.

First of all, it’s a zero-yielding asset. And one of our calls was that when interest rates had to normalize, they would take it on the chin. That indeed did occur. Now we’ve gone through that phase and now we’re going to go through digestion, but we’ve got regulations coming forward. We’ve got institutions wondering whether it’s really an investment vehicle that they can put money in credibly

I think if you are going to do it, certainly pick your horses that you want to run with and the better ones. You’ve seen a whole bunch of competition come in from central banks as well. But I would say of the 7,000 cryptos, a lot of those will probably get washed out. It’s much like the dot-com bubble in the 1990s. After the initial crash, it doesn’t mean there weren’t some great players in there and it doesn’t mean the theme didn’t exist. It just meant you had to get really selective.

CJ: You know, not that I want to make everything about me, but as someone who has $12 in cryptocurrency, or that’s what they told me it was worth when they gave me $10 of DuckDuckCoin and $2 of BBQcoin, you may have just told me that my crypto was worthless.

To listen to the full interview, please visit Money Life with Chuck Jaffe.

Read more: ‘People who really know what ESG data is, know it isn’t political’

Read more: Check out MRB’s track record.